Recession next year: forecaster says things can only get worse

The UK economy is heading for recession next year and unemployment could top two million by 2010. That's the gloomy prognosis from the Ernst & Young Item Club, which publishes its summer forecast tomorrow.

Peter Spencer, Ernst & Young's chief economist, said: "Both on the high street and in the housing market, it will get a great deal worse before it gets better."

He added that the economy will struggle to avoid recession next year, with predicted GDP growth of only 1 per cent. "Our worry is that without the usual medication from the Bank of England, consumers will move from their current state of denial into a state of despair."

Ernst & Young's dismal forecast comes after Sir John Gieve, deputy governor of the Bank of England, warned that inflation is set to climb well over 4 per cent this year. He also admitted that a recession looks likely.

In a severe blow to Gordon Brown, the Treasury has been forced to admit it is working on plans to reform its fiscal rules on spending and debt as the Government will break its own rule limiting net public-sector debt to 40 per cent of national income.

But Mr Spencer said this profligacy was no surprise. "As we have consistently warned, both the consumer and the Government have been living beyond their means for the last few years, overborrowing on credit. Households will be lucky to see real disposable income growth of 1 per cent this year. With repayments becoming more onerous, rising inflation and sharp reversals in the housing and equity markets, consumers are under increasing pressure."

The extent of the economic crisis was brought home again last week when 6,000 jobs were lost at Wolseley, the plumbing to building materials company, and 375 jobs were cut at Kier, the housebuilder.

Mr Spencer said unemployment will rise but not at the rate of previous downturns. Immigration is falling, he added, which will lessen the impact of job losses.